Tenet Healthcare Corporation

Greetings and welcome to the Tenant Healthcare second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mr. Will McDowell, Vice President of Investor Relations. Thank you, sir. You may begin.

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's second quarter 2022 results, as well as a discussion of our financial outlook. Tenet Senior Management participating in today's call will be Ron Rittenmeyer, Executive Chairman, Dr. Som Satoria, Chief Executive Officer, and Dan Kinsellmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation which has been posted to the investor relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represents management expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information Investors should take note of the cautionary statement slide included in today's presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that, I'll turn the call over to Sam.

All right. Thank you, Will, and good morning, everybody. This quarter, we are once again pleased to deliver strong results based upon our continued discipline management through a challenging market and the previously disclosed cyber attack. We generated enterprise net operating revenues of $4.6 billion and consolidated EBITDA of $843 million. USPI delivered impressive EBITDA growth of approximately 15% excluding CARES Act grants. Volumes were consistent with 2019 pre-pandemic levels. We remain convinced that the demand for our ambulatory surgery services will recover consistently above pre-pandemic levels when COVID prevalence declines. Our hospitals perform very well in a complicated environment. On labor, despite the challenging environment in contract labor rates and utilization, we managed to a modest reduction in overall SWB as a percentage of net revenue from the prior year. We will continue to employ disciplined cost management practices while focusing on building back the high acuity volumes at the heart of our strategy as this new COVID wave runs its cycle. In the midst of these challenges, we are pleased to have ratified a three-year agreement with the California Nurses Association on a new contract that includes eight of our California hospitals. We appreciate the collaboration to support our nurses and maintain uninterrupted patient care in coming to a resolution quickly. The partnerships we have with the unions that represent our employees have resulted in approximately 50 successfully negotiated agreements since the onset of the pandemic. Disruption from the cyber attack clearly added significant pressure on volumes and earnings in April and May. We estimate this incident had an unfavorable impact of approximately $100 million on adjusted EBITDA during Q2. We have filed our insurance claim and continue to insist on full payment from our insurance companies. Unfortunately, the speed at resolving this is slow, but we are committed to driving this to a reasonable and appropriate resolution as quickly as possible. Importantly, this attack should be considered one-time impact. Our systems have been rebuilt, and we have restored network operations. As such, though we typically do not discuss individual monthly results, it is important to note that we saw significant recovery in June, which we believe creates optimism about the second half of the year. June patient acuity was strong relative to April and May, and we saw growth in high-acuity service lines including cardiovascular, neonatal, and spine. We also saw improvement in our surgical admissions, outpatient visits, and outpatient surgical visits, and hospital-adjusted EBITDA, excluding grant income, improved significantly in June compared to April and May. Conifer delivered mid-single-digit revenue growth and margins were strong at 27.9%. We continue our focus on multi-shore recruitment and adding scale in our global business center. These activities are an important component of our ongoing work to expand margins on a sustainable basis. We continue to revitalize our sales efforts and have seen a significant increase in opportunities with our point solutions for new and existing clients. In fact, opportunities with new clients that we are pursuing have more than doubled in the last year. In addition, Conifer will extend point solution services to USPI to further enhance ambulatory revenue cycle performance. As you can see, we are continuing to deliver results across each of our businesses. Based on our enterprise performance year to date and our confidence for the balance of the year, we are once again reiterating our full year 2022 adjusted EBITDA guidance range of $3.375 to $3.575 billion. We believe this is competitively attractive as an outlook and reflective of our business diversification in the ambulatory surgery and conference segments, which are relatively insulated from the contract labor exposure, as well as our disciplined management in the hospital segment. I would like to spend a few minutes discussing USPI in more detail. Our work to accelerate investments in this high-growth area continues unabated. We now own 100% of USPI's voting shares after acquiring Baylor Scott & White's equity position in USPI for approximately $400 million at the end of the second quarter. This transaction does not impact our collaboration with our esteemed partner in the Dallas-Fort Worth market, which we have enjoyed for over 20 years. Our joint venture with Baylor remains one of the largest surgical facility JVs in the country that will work together to continue to grow. USPI is the preferred operating partner for both physicians and health systems as our teams deliver market-level strategic planning, operational excellence, and scale-based advantages that are unmatched. We are the leader in the highly fragmented ambulatory surgical space with approximately 7% market share. We see significant runway towards expansion of our footprint and expect to have 575 to 600 ASCs in place by the end of 2025. Our dedicated development team is constantly identifying new opportunities such as our recent announcement to acquire ownership in 22 ASCs from the United Urology Group. United Urology is one of the largest urology practices in the country. We recently closed the transaction, which adds well-established and new ASCs in key markets like Maryland, Colorado, and Arizona. The deal is an investment of roughly $100 million, and we expect to drive the EBITDA less NCI multiple below five times within the first few years. Partnering with larger physician practice platforms remains an important diversification and growth strategy. UUG is one of a growing number of strategic partnerships we have in place with PE-backed and independent MSOs where physicians are looking for a highly capable ASC partner. Through these collaborations, we help independent physician groups unlock growth in their centers while maintaining their independence, consistent with our historical practice, but now we're doing it at scale. Our ability to deliver operational excellence and synergies makes us a very attractive operator. We also continue to foster strategic partnerships with health systems, some of which build on successful relationships that span many years. One such example is an LOI we recently signed with the Providence Health System to expand our relationship, with whom we have been JV partners since 2004. We intend to invest more than $200 million in ambulatory M&A each year and have a robust pipeline to comfortably support that level of investment. All in for the past quarter, we acquired or opened seven facilities, not including the UUG deal I already mentioned. We continue to be active in the construction of new centers originating from our USPI development team and separately from our SCD partnership pipelines. We currently have about 20 centers that are in active syndication or under construction. The ambulatory surgery business is a highly capital efficient business model with capital needs that are a fraction of what we see in the hospital business. As we continue to scale our ambulatory capabilities, we expect to drive substantial growth in free cash flow for the enterprise. Before I pass the call over to Dan to discuss our results in more detail, I'd like to leave you with a few thoughts. Whether we are in a favorable or a tough operating environment, we are building value for our stakeholders through business diversification and a commitment to disciplined execution. Three months ago, we reported strong results during a challenging Q1 that saw significant inpatient and outpatient disruption from COVID cases. At that time, we maintained full-year guidance for adjusted EBITDA and free cash flow. During the second quarter, we have witnessed our stock price fall by more than a third, continue to see COVID-related staffing disruption, and experience soft utilization in April and May, partially due to a cyber attack. Despite these unplanned obstacles, our team has again delivered solid operating results and maintained guidance for adjusted EBITDA and free cash flow for the full year. Our portfolio mix and strong execution underlie these results. Right now, we are operating in the same challenging environment that everyone faces in healthcare services, but we are executing successfully using the data-driven operating platform we've created. It is driving strong financial results, but at the same time, it is improving quality for patients, continuing to generate value for payers, and finding efficiencies that support affordability. On labor, while contract labor costs remain elevated, we are managing our resources well. Importantly, and to reiterate, both USPI and Conifer, which represent about half of our adjusted EBITDA, are relatively insulated from these issues. As you heard, we are very bullish about where we are with USPI. We now own 100% of USPI's voting stock, a move which we believe is in the best interest of our shareholders and our company, given the compelling growth runway ahead. We are reaffirming our full year 2022 adjusted EBITDA guidance range of 3.375 to 3.575 billion. We believe Tenet continues to present an attractive opportunity for investors, given the ongoing business diversification in the USPI and Conifer, as well as the very strong management of our hospital segment. Even now, but surely as we progress towards 50% of the company's EBITDA coming from USPI, we believe the conditions for a material premium to a hospital-only valuation would be fair and appropriate. And with that, Dan will now provide us more details on the financial results Dan, I'll pass it to you.